Why the Russian rouble is outperforming and what it means

Forex

Summary:

The Russian rouble’s 45% surge in 2025 reflects tight monetary policy, high interest rates, and yuan-based trade. But it hurts exports and budget revenues, creating tensions within the sanctioned economy.

The Russian rouble's 45% rise against the U.S. dollar since the start of the year has made it one of the world's best performing currencies - but the sharp appreciation is proving to be a double-edged sword for the heavily sanctioned Russian economy.

The strength of the rouble means that dollar-denominated energy revenues generate fewer roubles for the Russian budget. Russian businesses also argue it is making exports more expensive to buyers in dollars and other currencies.

But President Vladimir Putin's central bank governor, Elvira Nabiullina, argues that a softer currency would be a sign of economic vulnerability.

Nabiullina, who on Friday announces the latest interest rate decision, says the exchange rate is not just there to please exporters, stressing that the strong rouble is a product of the tight monetary policy needed to fight stubbornly high inflation.

The following explains some of the factors behind the rouble's rise and its implications.

WHY HAS THE ROUBLE RISEN SO MUCH AGAINST THE DOLLAR?

The rouble has strengthened about 45% against the dollar this year. The rise is driven primarily by the central bank’s tight monetary policy and optimism after U.S.-Russia talks in February raised hopes for a peace settlement in Ukraine.

Interest rates on rouble deposits have also soared above 20%, making the currency attractive to savers and as a speculative trade for its yield. At the same time, high borrowing costs have slowed imports, reducing demand for foreign currency.

The weakness of the U.S. currency, whose index lost 6.6% since President Donald Trump's "Liberation Day" tariff announcement on April 2, has also helped the rouble.

Although the central bank says there is a freely floating exchange rate, it has been selling the Chinese yuan, its only major intervention tool, to support the rouble. When the rouble strengthens against the yuan, its rate against the dollar strengthens as well to avoid arbitrage.

The stronger rouble helps the regulator fight inflation by making imports cheaper. VTB’s First Deputy CEO Dmitry Pyanov alleged recently this is part of a deliberate strategy.

The rouble is also supported by currency controls introduced after the start of the war in Ukraine to prevent capital flight but recently exporters have been repatriating more foreign currency revenues than they are obliged to.

HOW IS THE ROUBLE TRADED?

Since sanctions hit the Moscow Stock Exchange (MOEX) in 2024, the rouble trades over-the-counter against the dollar and euro. Banks report their quotes to the central bank, which uses them to set the official rate.

This market is opaque since only the central bank sees full transaction data. Some smaller, mostly non-Russian banks report quotes to market data providers.

The rouble trades against the yuan on MOEX. Dollar/rouble futures, which also trade on MOEX, provide some market guidance on exchange rate. There is no black market rate for foreign currency in Russia.

The rouble is no longer a major internationally traded currency and many Western companies and banks have left Russia. But Russia remains a top oil and agriculture exporter and the world’s 11th largest economy.

Russia's push to shift trade into non-Western currencies, especially the yuan, may have implications for the global dominance of the U.S. dollar in the long-term. Major developing economies like China and India are watching closely.

WHY IS ROUBLE-YUAN THE BIGGEST PAIR?

The yuan has overtaken the dollar as Russia’s most traded foreign currency. In 2024, 95% of Russia’s trade with China was settled in yuan and roubles.

Yuan-rouble trading volumes on the Moscow Exchange reached 33 trillion roubles ($420 billion) in 2024. Russia’s total trade with China hit a record $245 billion. The rouble is up against the yuan by 25% this year.

Energy firms repatriate yuan earnings, while importers use yuan to buy goods. Most analysts now focus on the rouble/yuan rate, not the dollar.

WHAT DOES THE RUSSIAN GOVERNMENT SAY ABOUT THE ROUBLE?

The government wants a weaker rouble to boost budget revenues. The 2025 budget assumes an average rate of 94.3 roubles per dollar, but the current rate is around 78.

If the rouble stays strong, VTB analysts estimate the budget could lose 2.4% of its revenues this year.

Exporters, from oil to metals to agriculture, are also hurting. A stronger rouble makes their revenues shrink. Many officials and business leaders say they would prefer a rate of 100 to the dollar.

Putin has not spoken publicly about the rouble's strength in recent months.

HOW DO ORDINARY RUSSIANS VALUE THE ROUBLE?

The public still sees the dollar as the benchmark, even though yuan use is rising. Cash dollars and euros remain available in bank branches, though there are now far fewer exchange offices than in previous decades.

Sanctions have made foreign travel and dollar and euro international transfers harder, reducing demand for cash dollars.

In the first quarter of early 2025, Russians bought about 200 billion roubles’ worth of foreign currency, unchanged from a year earlier. High rouble interest rates have made foreign currency savings less attractive.

WHAT LIES AHEAD FOR THE ROUBLE?

Analysts have warned for months that the rouble is overvalued, but the currency has defied their forecasts so far.

The central bank is widely expected to cut interest rates at its upcoming meeting. If it does, market rates will fall as well, prompting savers to pull money from rouble deposits. That could weaken the currency.

A bigger test looms in early September, when a 50-day deadline set by U.S. President Donald Trump for Russia to show progress toward peace in Ukraine expires. If new U.S. sanctions targeting buyers of Russian oil follow, the rouble could come under renewed pressure.

The last time the rouble weakened significantly was in November 2024, after Washington sanctioned Gazprombank, which had handled oil and gas payments.

A source close to the central bank pointed to Reuters that when the regulator cut the key rate from 17% to 11% between February and July 2015, the rouble took several months to weaken gradually. This is the regulator's expectation this time.

Source: reuters

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Thomas

Central Bank

European Central Bank policymakers pushing for another reduction in interest rates face an uphill battle, according to people familiar with the matter.

A hold looks like the baseline for September after eight cuts since June 2024, the people said, asking not to be identified revealing private discussions. Some suggested that the onus is on those seeking further easing to justify their stance, rather than those opposed to more action having to make their case.

Given what can still happen with US tariffs before and after an Aug. 1 deadline for talks to conclude, the people highlighted that views can still shift.

An ECB spokesperson declined to comment.

Earlier Thursday, the ECB kept rates unchanged for the first time in more than a year as it looks for clarity on the European Union’s trade ties with the US. President Christine Lagarde said she and her colleagues are now in a “wait-and-see” mode, with inflation at the 2% goal and the economy performing in line with or expectations.

Following those comments, markets pared bets on a September rate cut. They now put the chance of such a move at about 25% versus 40% before Lagarde spoke. A majority of economists polled by Bloomberg earlier this month predicted a final reduction in the deposit rate, to 1.75%, at the Sept. 10-11 meeting.

Source: Bloomberg Europe

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Adam

Stocks

The S&P 500 and the Nasdaq rose on Thursday, as investors sifted through a patchwork of earnings from megacaps like Alphabet and Tesla, while the Dow was weighed down by losses in UnitedHealth and IBM.

At 9:46 a.m. ET, the S&P 500 gained 10.62 points, or 0.17%, to 6,369.85 and the Nasdaq Composite gained 66.26 points, or 0.33%, to 21,086.27.

Alphabet rose 1.9% after the Google parent raised its 2025 capital spending forecast by $10 billion to $85 billion, shrugging off trade jitters, while electric vehicle maker Tesla tumbled 7.6% as CEO Elon Musk warned of "a few rough quarters" due to cuts in EV incentives.

Losses in UnitedHealth, IBM and Honeywell weighed on the blue-chip Dow, which fell 0.6% -though it remained close to its December 4 record high.

UnitedHealth lost 2.3%. The insurer revealed it's cooperating with a Department of Justice probe into its Medicare practices, following reports of both criminal and civil investigations.

IBM sank 9.5% as its second-quarter results fell flat with investors, hampered by disappointing sales in its core software division.

Honeywell, meanwhile, dipped 5.2% despite topping Wall Street's expectations and raising its annual outlook.

On the trade front, an EU spokesperson hinted that a deal was "within reach"—one that could slap a broad 15% tariff on imports across the 27-member bloc, according to diplomats.

Meanwhile, fresh signs of progress emerged after President Donald Trump struck an agreement with Japan, slicing tariffs on Japanese goods to 15%. China and South Korea are also scrambling to clinch their own deals and sidestep Trump's hefty duties.

Yet, some of Wall Street's heavyweights were starting to feel the sting of Trump's sweeping tariffs, injecting a dose of caution into the market mood.

American Airlines fell 9.2% after forecasting a bigger-than-expected third-quarter loss, hurt by sluggish domestic travel demand.

Shares of ServiceNow rose 5.5% after the software firm raised its annual subscription revenue forecast.

Markets were also monitoring developments after the White House surprised investors that Trump - fresh from stepping up his criticism of Federal Reserve Chair Jerome Powell - would pay a visit to the U.S. central bank's headquarters later in the day.

With the Fed widely expected to hold rates steady at next week's meeting, traders are now pricing in a 62% chance of a September rate cut, according to CME's FedWatch tool.

The latest Labor Department report showed weekly jobless claims fell to 217,000—well below estimates—signaling continued resilience in the U.S. job market.

"It (data) is a good guide for the health of the economy and this week’s jobless claims show that the economy is ticking along just nicely," said Neil Birrell, chief investment officer at Premier Miton Investors.

U.S. business activity gained momentum in July, but companies hiked prices on goods and services—a move that’s fueling economists’ predictions of faster inflation in the months ahead, largely driven by rising import tariffs

Declining issues outnumbered advancers by a 2.05-to-1 ratio on the NYSE and by a 1.63-to-1 ratio on the Nasdaq.

The S&P 500 posted 21 new 52-week highs and two new lows, while the Nasdaq Composite recorded 40 new highs and 13 new lows.

Reuters: source

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Daniel Carter

Political

"Everyone is stating that I will destroy Elon's companies by taking away some, if not all, of the large scale subsidies he receives from the U.S. Government. This is not so! I want Elon, and all businesses within our Country, to THRIVE," Trump posted Thursday on social media, though it was unclear exactly what comments he was responding to.

"The better they do, the better the USA does, and that's good for all of us. We are setting records every day, and I want to keep it that way!" the president added.

Shares of Tesla Inc. fell 8.6% as of 10:42 a.m. in New York during the first trading session since the company reported a steep drop in revenue and Musk warned of difficult times ahead for his electric vehicle maker. The stock had declined 18% this year through Wednesday's close.

The comments mark the latest twist in the tumultuous relationship between two of the world's most powerful figures, after a falling out that has led Musk to unleash a barrage of attacks on Trump and float the creation of a new political party. The US president in response threatened to terminate Musk's government contracts and subsidies.

Both men subsequently moved to make amends, but the damage was done to Musk's business interests. In a quarterly earnings statement Wednesday, Tesla cited the loss of electric vehicle subsidies and increased tariffs — both Trump policies — as two headwinds for its car-making and energy businesses.

Musk on Wednesday warned of the EV maker would be in transition for the next year after losing tax incentives in the US and needing time to roll out autonomous vehicles.

"We probably could have a few rough quarters," Musk said.

Tesla Chief Financial Officer Vaibhav Taneja also said Wednesday that Trump's fiscal package has "certain adverse impacts" on its energy business, most notably on residential storage because of the early expiration of consumer tax credits.

"The challenges of the storage business, therefore, remain both from the bill and from tariffs, and we're doing our best to try and manage through this. But it will — we will see shifts in demand and profitability,"Taneja said on an earnings call.

Source: Yahoo Finance

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Adam

Economic

Renovations at the Federal Reserve are set to get a high-profile probing today when President Trump and his allies visit the central bank's headquarters after weeks of mounting criticisms over a $2.5 billion renovation.

Trump is set to arrive at 4:00 p.m. ET in a highly unusual presidential visit to the building on the National Mall, less than a mile from the White House.

The construction site tour is just one of numerous political pressure points being put before Federal Reserve Chair Jerome Powell by Trump and his team — even as the latest rhetoric from the president and Treasury Secretary Bessent has downplayed the chances of any imminent attempt to fire the central banker.

"In eight months, he'll be out," Trump noted on Tuesday, with Bessent adding Wednesday in various television appearances that "we're in no rush" to change leadership and that a new chair nominee would be announced in December or January.

In short, Powell's job is looking slightly more secure this week — but the central bank chief's problems clearly aren't going away.

Up first is today's visit from Trump.

The focus there is ongoing construction of the Federal Reserve headquarters amid critiques from newly appointed Trump allies on the National Capital Planning Commission (NCPC) that could go so far as to seek to stop ongoing construction pending further review.

In addition to Trump, today's tour is expected to include White House deputy chief of staff James Blair (who is also a new member of the NCPC), budget director Russell Vought, and Federal Housing Finance Agency Director Bill Pulte, who has emerged as another vocal Powell critic.

Then, in the coming weeks, Powell will wrestle with calls for an "exhaustive internal review" of the Fed's operations and pressure from Republicans on Capitol Hill that could ramp up in the fall.

The Fed got another new headache Thursday when a money manager — and Trump ally who recently served as an adviser to the Department of Government Efficiency — filed a lawsuit arguing the central bank is violating a 1976 federal law by keeping its policy meetings behind closed doors.

There's even a long-shot call for the Department of Justice to get involved and look at Powell personally.

This comes as Powell is set to gather the Federal Open Market Committee (FOMC) next week for another interest rate decision. Markets and many analysts say this is pushing all of Trump's actions as the president continues a daily pressure campaign to press the central banker and his colleagues to cut interest rates.

Up first: A high-profile site tour

Today's tour of the Federal Reserve headquarters is at the behest of Trump allies recently appointed to the National Capital Planning Commission (NCPC).

Blair, one of Trump's top aides, has leveled a series of attacks on Powell for weeks now over the building cost overruns, even charging at one point, "What do they not want us to see?"

The central bank has repeatedly defended itself against the charges, even publishing a page on its website devoted to the renovations. It says the increased costs came because of increased material costs and "unforeseen conditions" like asbestos, toxic contamination in the soil, and a higher-than-expected water table.

The project costs have grown from around $1.9 billion to $2.5 billion after the Fed submitted designs to the NCPC and received approval from that agency in 2020 and 2021.

The two buildings, Powell added in a recent note, were in need of "significant structural repairs" after not having a comprehensive renovation since they were built in the 1930s.

The changes, argue Trump allies like Vought, could mean the project is out of compliance with the approved plan, leading to a possible standoff as to whether the central bank needs to resubmit to the NCPC.

Powell is clearly looking to avoid that scenario, writing that the bank "does not regard any of these changes as warranting further review." But White House officials are sending a different message.

"We want to see it for ourselves," Blair recently told reporters, adding that he is also looking to obtain "all of the revised plans since 2021."

Federal Housing Finance Agency Director Bill Pulte is also expected to join and has already traveled to the site to film a video, as he called the construction costs "very disturbing."

Other key pressure points

This week's site visit comes as Powell is weathering an array of additional pressure points, with many lines of inquiry ongoing from Capitol Hill.

Rep. Dan Meuser of Pennsylvania is a subcommittee chair on the House Financial Services Committee and told Semafor this week that he is weighing a congressional investigation of the Fed — even as his Senate colleagues have shied away from that idea.

Rep. Anna Paulina Luna of Florida, another Trump ally, formally requested that the DOJ investigate Powell for perjury over June comments about the renovations. That is seen as a long shot at best.

Perhaps more pressing is that House Speaker Mike Johnson said in an interview with Bloomberg reporters and editors this week that he is "disenchanted" with Powell and is even open to modifying the 1913 act that created the Fed.

That would be a major change, but it is not expected to be before Congress in the near term, as the House of Representatives went home Wednesday evening for a recess that is scheduled to last for the rest of the summer.

Republican Sen. Tim Scott — who asked Powell about the Fed's renovations during a June 25 hearing — sent Powell a letter Wednesday asking for more questions to be answered by Aug. 8. He said there were "distinct differences" between public plans about the renovation, Powell's testimony, and what the Fed has said on its website.

Treasury Secretary Bessent has also called for an "exhaustive internal review" of the Fed, saying it could be Powell's "legacy," as he accused the central bank of mission creep in its non-monetary policy activities.

Trump has signaled his support for the effort, and some observers say this could be the most consequential change if the idea gains steam and looks to reshape how the central bank operates.

A recent note from Signum Global Advisors called this potentially "an even more holistic reshaping of the Fed than a 'mere' dismissal of Chair Jerome Powell," adding it's an effort that could extend even beyond the end of Powell's chairmanship.

Source: finance.yahoo

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Warren Takunda

Economic

Canada's retail sales shrank by 1.1% in May as consumers curtailed car purchases and spent less at supermarkets, convenience stores and on alcohol, data showed on Thursday.

Retail sales - closely watched by economists as they give an indication of GDP trends - had held up fairly strongly in the last two months, as concerns around the timing and magnitude of tariffs threatened by U.S. President Donald Trump brought forward purchases.

But sales weakened as the impact of tariffs started hitting consumers and the general outlook around the economy paled.

By contrast, an early or "flash" estimate showed retail sales likely grew 1.6% in June, though this figure is prone to correction, statistics agency StatsCan said.

Analysts polled by Reuters had expected a drop during May, similar to what was reported, and barring autos and auto parts, which contribute almost 30% to overall sales, they had predicted a drop of 0.3%.

Sales excluding autos in May were down 0.2%, StatsCan added.

The biggest drop was posted in the motor vehicles and parts dealers category, where sales contracted by 3.6%, after two consecutive months of increases.

The drop was led by 4.6% lower sales at new car dealers, which fell for the first time since February, it said, adding that in volume terms, retail sales decreased 1.4% in May.

LOWER BEER SALES

Another declining sector was food and beverages. This category, which contributes up to 18% of total retail sales, saw purchases shrinking by 1.2%, led by lower transactions at convenience stores and a decline in sales of beer, wine and liquor.

Economists noted the expected rise in sales in June which could indicate that GDP might improve in the second half of the year, but said trade tensions are likely to keep consumer spending under check.

"Unless a trade deal is reached to significantly reduce U.S.-Canada tariffs ... we expect households will continue to tighten their purse strings as job losses and higher prices from tariffs squeeze disposable income," said Michael Davenport, senior economist at Oxford Economics.

The Bank of Canada will announce its rate decision next week and is likely to keep borrowing costs on hold, but most economists expect the central bank will need to start easing rates again to support the economy.

The largest increase in retail sales in May came in building materials, and garden equipment and supplies, which posted an increase of 1.9% following a decline of 0.3% in April.

A survey of retailers by StatsCan on the impact of U.S. tariffs and Canada's countermeasures showed that 32% of retail businesses were impacted by the trade tensions in May, compared with 36% in April.

The most common impacts in May were price increases, changes in demand for products, and increased expenses for raw materials, shipping or labor, it said, citing the survey.

Source: Reuters

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Adam

Economic

Global equities ex-US were already leading US stocks in 2025 by a wide margin ahead of the trade deal announced this week between the US and Japan. Following the news, shares in Japan surged, providing lift to foreign stocks generally. The US market also rallied on the news, lifting the S&P 500 Index to a new record high. But in relative terms, the international return premium this year has continued to widen, based on a set of ETFs through Wednesday’s close (July 23).

Vanguard International Stock ETF rose sharply yesterday, and is now up 21.8% year to date. US shares (SPY) are also rallying this year, but remain fair behind with an 8.9% increase. In fact, all the major slices of world equities continue to reflect American shares with the weakest gain so far in 2025.

Japan Trade Deal Boosts Return Premium for Foreign Stocks_1

The catalyst for the latest pop in foreign shares is the US-Japan trade news. On first glance, the deal isn’t an obvious trigger for macro optimism. US tariffs on Japan are now set at 15%, which marks a significantly stronger headwind for trade vs. the lower rate that marked the start of the year. But relative to the 25% “reciprocal” tariff that had been applied recently, markets responded with a sigh of relief, one could say.

The news also inspires optimism that the European Union will find common ground with the Trump administration ahead of the Aug. 1 deadline, when the US will raise tariffs on countries that don’t sign a new deal by that date.

FT reports: “The EU and US are closing in on a trade deal that would impose 15% tariffs on European imports, similar to the agreement Donald Trump struck with Japan this week.”

Some corners of US industry, however, aren’t happy. US automakers grumble that a 15% tariff on Japanese vehicles puts them at a competitive disadvantage, citing higher imports taxes on steel, aluminum and parts.

“We need to review all the details of the agreement, but this is a deal that will charge lower tariffs on Japanese autos with no US content,” said Matt Blunt, president of the American Automotive Policy Council, which represents General Motors, Ford and Stellantis.

Markets, however, are cheering. US equities are celebrating too, but so far this year the cheering in America is drowned out by the widening performance spread in favor of foreign stocks.